Design of investment criteria system in residential and commercial real estate providing maximal rate of return for investor in short term

Размещено на http://www.allbest.ru//

FEDERAL STATE EDUCATIONAL INSTITUTION

OF HIGHER EDUCATION

NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

Saint Petersburg School of Economics and Management

Department of Management

Design of investment criteria system in residential and commercial real estate providing maximal rate of return for investor in short term

Bachelor's thesis

In the field 38.03.02 Management

Educational programme `Management'

Yaroslav Bogdan Igorevich

Abstract

The following paper concerns the field of real estate trade in Saint Petersburg and also considers factors influencing real estate prices to conduct speculations on property markets. At the beginning conditions of USA real estate market are being considered in order to match fluctuations with economic situation locally and globally as well. Obtained analysis enables to predict further price movement and to ease investment decision-making. After that, the author argues about approaching volatility increase of Russian real estate market due to fundamental economic, political and legal factors. Then commercial and residential property markets were divided into sectors and each sector was analyzed to understand the most appropriate one for investing. Finally, the author estimates perspective objects of residential property and commercial one with accompanying analysis of investment attractiveness with criteria, which should be respected to make proper investment decision.

Key words: real estate, investments, commercial and residential property.

Introduction

investment developer business

In case of premise crisis appearance, investors haste in making decisions and also follow the trodden path by purchasing bonds, currencies or open deposits. However, aside from saving the capital, owners are intended to benefit at least the percent, which could exceed the inflation rate. Besides that to hold all the savings in national currency remains risky even now when the level of political instability is inadmissible high (Kallberg, J. G., Liu, C. H., & Greig, W. D., 1996). As for foreign currencies such as dollar or euro, there is no confident answer if the stable dynamic of increase as it was in 2014-2015 would be retained this year. Moving to the most liquid and reliable asset, despite the nature of the market, bullish or bearish, real estate tends to be the most suitable for holding the savings. Thus, real estate investments are being used in European hedge and pension funds to level impact of inflation or deflation (Brounen, Prado, and Verbeek, 2010). Moreover, private investors not so rare resort to real estate purchase in order to diversify their portfolio (Chun, Sa-Aadu, and Shilling, 2004).

Location was not chosen by chance. According to «Rosstat» Saint Petersburg is observed as the most popular Russian city for migrants from regions. Thus, as the demand for living there is stable, developers are intended to satisfy the need by constructing new housing building and restoring historic building, which located mostly in the center of the city. Moreover, an ongoing expansion of huge developers of Moscow is being observed since 2014. Thus, according to RBK the average square of commissioned buildings of residential and commercial properties in Saint Petersburg is sharply rising among authoritative Moscow developers such as «Samolet Development», «Glorax Development», «FSK», «Pioneer», and «PIK». Despite the highest average salary in Moscow and consequently the highest purchasing power of population, above mentioned developers carefully pay attention on property market of Saint Petersburg due to its population growth and low level of building up, thereby, replenishing their property portfolio.

Moving to research, the question is to create a decision-making system (DMS) for purchasing objects of real property in order to make from 20-40% returns per year. Concerning research objectives, they are the following. Firstly, to analyze a real estate market of USA in terms of development and influence of economic events and to project this model on Russian real estate market to revel correlations for further price movement forecast. After that, it is worth investigating which sectors could be mostly suitable for investments. Than to consider cases with increased attention and reveal uncommon factors influencing real estate prices. With fully encompassed analysis, we may make decision-making system, which enables to make sure in investment decisions.

Regarding the legal situation in Russia (A.I. Evstafev, A.O. Peretrukhin, 2013) the author is strictly convinced that 2019 year is the most suitable for investments in real estate sector. The first thing, which has to be mentioned is the rise of value-added tax (VAT) from 18 to 20 percent. Thus, there is an assumption that real estate prices will go up soon despite that fact that developers of blue chips have already raised the prices till the end of 2018. The second thing is legislation amendment concerning real estate investor safety, or changes in Federal Law №214.

Until now, the scheme of interaction between developers and buyers was straight without any intermediaries. However, this type of interaction led to deception of developer and consequently cheated holder. According to information portal RBK, in Saint Petersburg and in Leningrad region the amount of investors without their housing exceeds 23 thousand. Thus, government was decisive to protect holders and then released a bill concerning share building. This bill tells that now in order to buy a flat on the trench stage a shareholder has to pay the bank, who in its term provides this amount of money to developer as a debt with fixed percent. As commissioning delays are fraught with extra costs for developer, in order to hedge this risk they would definitely raise the prices. Besides that banking service is not for free, thus, the payment could be included in real estate price as a percentage. The last but not the least is the political instability and renewed sanctions, which influence holistic country's welfare. However, despite the clarity of the problem, it possesses unprecedented feature as legislation in share building was formed in 2004 and still there are some underwater rocks where both sides may suffer. Thus, there is no such literature for this topic. However, despite the changes in legislation between different countries, we may look for template cases.

Another side of issue relevance responds to transition from long-term investments to short-term ones with regarding increased preference. As it could be observed within modern functioning economic conditions investors tend to aim on short-term returns or speculations with increased desire to obtain capital as soon as possible. Eventually liquidity in long term period is being chased in short term. However, investing of short term does not provide those returns in long term, and at least to gain comparable numbers investor has to possess substantial capital, and as a result using leverage with debt. This shift is conditioned with average salaries decline leading to decreased purchasing power and dramatic sustained real estate prices growth, which was apportioned for 3 years from the announcement of №214 Federal Law regulations. Thus, to obtain substantial or maximal returns, investor is projected to raise debt capital for ensuring financial leverage. This aspect of research paper is also considered: aside from decision-making system, we are aimed on conducting so-called due diligence covering financial topic including business planning, financing structure calculation and forecasting. By financial structure, we assume funding resources referring to competent finance management in case of using mortgage credit as above-mentioned leverage. It goes without saying that every investment is fraught with risks and every often huge risks may not correlate with maximized profit. Thus, in order not only to make your capital rise, but also to prevent losing it we have to explore and define hedge methods especially in terms of using debt or to funding model optimal in debt and capital ratio.

Concerning our algorithm for investors, the initial task is to define criteria and their influence on decision-making system. Crucial factors also involve bidder's legal form with regard to taxation, turnover periods in direct relation with returns, tax pressure assessment, and risk management. Considering all these factors in total enables to optimize investment decision with regulating capital engaged and hedging inevitable risks.

Eventually all kinds of investors especially institutional ones such as huge hedge funds which of them mostly do not tend to grow steadily experiencing sharp ups and downs and leading to investors' loyalty lose, are willing to uncover secret formula of success. However, to distribute the algorithm, enabling to make everyone successful, might be reckless.

In other words, the key relevance of the topic is to make decision-making process automotive in order to access every real estate object on investments potential. Despite any property estate object, it could be possible to evaluate and find out the most suitable for investment/risk ratio and investment/turnover ratio. To reach this goal we have planned to evaluate criteria, which laid in foundation of any strategy.

Theoretical foundation

To reveal condition of Russian real estate market it is worth considering so-called market guide country such as USA. According to Eric Ghysels (2013) the total turnover of real estate deals constituted more than $24 trillion at the end of 2012, which exceeded capitalization of USA securities market with $16 trillion respectively. Besides that, it was revealed that fluctuations of real estate market may cast influence shadow on other disjoint sectors (Case et al, 2005). Reinhart and Rogoff (2009) also showed influence of real estate market on both adjacent and non-contiguous ones in different countries of Europe from 1995 to 2008. Thus, dramatic ups and downs may serve as prerequisites for reversal of other markets. Eventually from global perspective, it might look significant not only to observe and understand reasons of real estate price movement - the knowledge and awareness of primary importance of property market over other ones enables to anticipate economic situation and make good investment decisions based on high accuracy analysis.

Thus, as US real estate market is turning out to be the greatest in terms of turnover, it was decided to identify main reasons for points of reversal and further to project condition of American property market on Russian one. Besides, we have to match American and Russian model in terms of timeframe, as American market still remains vital from 1928 while Russia was facing political and economic shifts such as NEP, thus, the property estate market was not efficient (Schegolev I.P., 2015). Eventually to make analysis relevant we firstly distinguished crucial points of Russian market and according to that made appropriate timeframes.

Besides that economic situation, GDP and finally welfare of citizens tend to influence housing issue. As it can be learnt mortgages rates in American market much lower than in Russian one despite the global financial crisis, which was caused by lower rates. Moreover, average salaries are significantly higher in US, and as a result, Americans do not face problems with property purchase even with credit funds, while Russian people are prone to experience troubles with real estate purchase and are willing to solve this problem as soon as possible, despite overwhelming majority of real estate deals are conducted with debt capital.

Concerning Russian market we may highlight the following periods: pre-crisis period 2004-2008, crisis period 2008-2012 and volatile period 2012-2015.

The first stage 2004-2008 - pre-crisis period

Before analyzing pre-crisis period, it is worth being mentioned that development and building sectors have just started to progress due to foreign direct investors and availability for imitation of foreign building technology and materials, while western countries already used their resource 10 years ago. This lag of Russian property market could be conditioned by stagnation in development sector and too sluggish shift from command economy to market one.

According to Gosstroy of Russia in 2006, over 19.5 square meters were accounted for one person while in 1990 this indicator showed only 16.7, which leads us to conclusion of increased demand on housing in Russia. However, at that time Russian real estate market experienced complex issues with sharp price increase during period of 2005-2007 and housing demand decrease in 40% at the same time. Besides that, we may strongly claim that given tendency was exactly imitated from American market when property prices firstly went up due to increased demand caused by low mortgages rates and furthermore crashed down dramatically dragging other markets along.

Crisis period 2008-2012

As it was mentioned above the first tendency was taken a pattern of American real estate market and the following period is not an exception. Despite crisis consequences, Russian housing market was split up on primary and secondary housing markets with transitory advantages for secondary one due to high risk of purchasing new building caused by possible bankruptcy of developer. Moreover, banking sector took actions for safety enhancement by increasing mortgages rates and plenty of bank were intended to refuse to provide loan secured by property, as there was a risk not to return funds. In addition maximum mortgage rate exceeded 20 per cent which also made customers wait till the economy will recover while developers were from sales loses.

Volatile period 2012-2015

Real income growth was documented in 2012 making property purchase more affordable. However, demand of the solvent population was depleted already in the beginning of 2012 and then housing market started stagnating. Despite increased number of real estate deals due to modernization of Federal Law №214, which protects shareholders, and banking policy of decreasing mortgages rates from 20% Russian real estate market still did not show significant changes in comparison with previous period.

One year later property market in Russia was moderately moving from stagnation phase to significant increase in prices due to deterioration of political and economic situations induced by annexation of the Crimea. Later on in 2014 consequences of sanctions in relation to Russian Federation, decline in oil prices and mass outflow of foreign investment made property market adopt bullish attitude. Nevertheless, it was documented that during 2014-2015 total income was declining while prices possessed reversal trend. According to Torgashina (2015) period of 2014-2015 was comparable in terms of macroeconomic development. 2015 year showed peak inflation rate in 16%.

Based on conducted analysis we may assume that Russian housing market is predetermined by macroeconomic situation and western markets, thus, being aware of politics and economics worldwide it is possible to forecast further market movement, thereby, earn abnormal returns on speculations.

Today's market conjuncture is the following. Most banks started rising mortgage rates overcoming record low rates in 8.9%. Moreover, some factors of internal policy such as regulations of Federal law №214 and increase of VAT point on early boom on real estate market. Thus, period of 2018-2019 is the most suitable time for making speculations. Finally, next purpose is to reveal the most proper type of market whether it is commercial or residential property.

Legal aspect of Russian real estate market

Real estate market represents two main embranchments referring to different legal and objective forms. To classify them it is worth firstly considering secondary real estate or resale market. Generally speaking, parties of the deal are the owner of property and the bidder. The subject of contract is an existing and already commissioned real property object. Taking American real estate market for instance, it goes without saying that conducting acquisitions of real properties for both above mentioned markets do guarantee to provide abnormal returns but at least they are insured from legal aspect. In Russian legal practices definition such a double sales occurs rather often and covers only secondary real estate market. Investors or people who would like to diversify their capital in the proper way with the purpose to prevent risks concerned with long-drawn building and developers' bankruptcy purchase resale property and consciously take risks of double sales. However, according to practice Russian legislation does not envisage regulations between bidder and offer due to semi-legal scheme of fraud. Thus, as legal aspect of real estate acquisition in Russia is far from being perfect and transparent, real estate investors' dilemma takes place. To buy for lower price becomes more dangerous due to possibility not to obtain property and take invested capital back while purchasing already built real estate is inherent with high level of risk to become fraud victim and consequently to lose both assets as well.

Now we are moving to primary real estate market, where developers realize rights to demand a specific object of real estate. Technically, as real property object has not been built yet, real estate investor or shareholder possesses the right to require real estate in the future. Thus, to raise funds for house building becomes easier for developers as they provide discounts for real estate investors. Eventually developers obtain capital for project realization while shareholder aside from the right to require real property in future in perspective may resell the object, which tends to grow in prices. Nevertheless, the according to informational portal RBK more than 15 thousand deceived interest holders suffered from unscrupulous developers who was declared bankrupt due to misuse of raised funds.

As far as Federal Law №214 was published in 2004, drawbacks concerning regulations and illegal capital use are still topical and to protect holders from these risks government decided to establish amendments to above-mentioned law. Despite that law adoption, regulating relations between shareholders and developers even in strict form, facilitated to contract form revolution and obligations for both parties. Moving to formation of federal law №214 above-mentioned definition of deceived interest holders was the main premise of legal regulations appearance. Relevance of this issue was reinforced by inability of developer to fulfill his liabilities to realize a shared construction project despite hardest effort from government to regulate this problem. As it was observed earlier re sale market is exposed by high level of frauds, leading to legal conflict which is not so often resolved in favor to victim. It appears due to falsification of property contract and especially if we consider more than third sale of property, to identify the real owner tend to be onerous. Nevertheless crowd funding or share building is inherit with more serious risks caused by plenty of external factors such as market conjecture shift, prohibition of materials and technology supply, as a result of political issues between Russian Federation and Western countries. Moreover, low level of legal aspect development leads to unconscientiousness of the developer or his officials and capital loss of real estate investors. Thus, the necessity to protect holders from frauds takes place through mechanisms controlling commissioning projects deadlines and bankruptcy of developers, as despite shareholders rights to require real property from developer, it is turning out to be problematic to obtain real estate or even turn investments back. Technically, shareholders protective mechanisms are regulated in adjacent legislative acts such as Federal Law №127 concerning developer's insolvency. According to legal practices, this legislative act prescribes acknowledgment of real estate investor's property rights for object of incomplete project realization in terms of auction complete and payments for holders in case of developer's bankruptcy. Moving back to issues concerning share building document arrangement, it is considered with absence of any assurance of project completeness from third parties contractors with quality maintenance in case of main developers' inability to complete project, as even a standard housing demands huge capital risings and multilevel calculations. To make hare building more reliable, governmental authorities established compulsory insurance from developer's financial risks with proper compensation of insurance costs by developer in case of partial accomplishment or noncompliance of his obligations and engagement of third parties, such as banks who are intended to provide citizens' payment to developers as a credit, in share building contract arrangement. However, in current situation only compulsory insurance is engaged while other legislations are being projected and will be established soon especially project funding or engagement of third parties, which are aimed on prevention of deceived interest holders of share building. Switch over project funding was announced in 2016 and by July 2019 all developers have to be engaged in project funding in obligatorily form. As it was mentioned above, high level of media hype concerning legal amendments of share building and possible consequences, most building companies especially authoritative and prosperous ones started sharply changing price policy. As there is more than 2 months to deadline left the obscurity of real estate situation takes place and even authorities concerned with legislation formation leave this without any comments. To describe renewed scheme of interaction we may assume that appealing to developer with purchase of real estate a client's funds will be credited to specific bank account of developer's bank partners. Authorizing and controlling functions of project funding will be accomplished by bank and it is jointly and severally responsible for project realization and thorough monitoring of budget costs of project at each stage of building. At this point risk of budget misuse and frauds appearance is intended to decline. Moreover, implementation of project funding mechanism will enable to decrease the bank surety. Eventually developers of second and third echelons facing financial and market difficulties due to occupied niches of mature building companies obtain perspectives of preferential crediting loans, which will positively influence real estate market. However, prices growth and implementation of project funding mechanism is not supposed to affect huge developers significantly unlike immature ones, as absence of experience is the main factor leading to postponement of the project, clients' loyalty loss and eventually bankruptcy. Therefore, immature developers or third echelon group are expected to leave market through acquisition by bigger building companies willing to complete perspective projects.

Moving back to insurance of financial risks in case of incomplete project it is worth mentioning that field of insurance in share building of Russian market appeared recently and proceeds developing. Its formation started from defined criteria of insurance companies for risk appearance and consequently insurance interest rates declined to 4.5 percent. Nevertheless, practically share building insurance protects from invested capital loss in case of incompleteness project and insurance companies reimburse costs to sufferer investor or buying in liabilities of developer with appropriate demanding rights. Moreover, it is worth mentioning that refundable funds may differ from amount registered in share building arrangement. Generally speaking, this service was not in increased demand among real estate investors due to extra costs, reaching from 5 to 15 percent from deal amount regarding 5 percent annual commission of insurance companies and taking into consideration level of risk validity shareholders often neglect this service, therefore, it does not obtain high popularity. Consequently, only objects with higher risk of incompleteness or real property getting accreditation may implement financial risks insurance. Usually the insurance contract is arranging on constructing terms with regard to technological lags and its terms last from seven to nine months. Concerning amendments of federal law №214 insurance services may become more demanded, thus, insurance market will develop towards real estate market.

Taking building incompleteness, this issue still remains unsolved and necessity to regulate completeness of frozen or blocked building is topical and requires additional legislation which may facilitate in protection level of real estate investors especially for those who already suffered from unscrupulous developers due to budget misuse and enrichment motives. Another aspect, which has to be taken into account, is versatility of legal practices of general jurisdiction and arbitration courts concerning share building involving both sides of the deal - legal entities or developer and individuals or investors.

Relevance of Federal law amendments

However, all mentioned above regarding impact of project funding tends to be invalid. In 24th of April a decree, regulating share building, was signed by prime minister of Russian Federation Dmitry Medvedev. This decree enables to raise shareholders' equity after July 1, 2019 without switching to project financing and opening escrow accounts. To proceed constructing with classic funds rising the following criteria have to be abided. Firstly, the level of project completeness should be no less than 30 per cent. Secondly, sales volumes of each building project of every developer should exceed 10 per cent. Moreover, these values are understated for those developers who complete projects of problem building companies. Thus, according to experts, more than 90 per cent of projects will be finished within standard payment order - through direct tranche on developers' accounts. The controversial problem involves reasons of price growth, if more than 90 per cent of projects will be completed with current regulations. It goes without saying that developers and professional market players were already aware of legislation establishment and market situation and this obviously was perfect example of speculative employment of hype and panic on real estate market. Besides, the market situation developers have to follow both above mentioned conditions in order to raise funds directly. If the first one can not be legally circumvented, the second condition is being solved the following way: a developer to reach 10 per cent of total sales volume legalizes pool of property on his employees to finish off 10 per cent. By the way, another possible threat might be a willingness of banks to finance a certain developer. According to senior vice president of «Globex bank» Alexey Titov, in order to decide whether to finance a certain developer or not, banks are willing to access feasible investment returns and project attractiveness first rather than operational performance of building company. Market validity and progress monitor are the main aspects in effectiveness estimation of project. Senior vice president is strictly convinced that aside from investment feasible returns banks including «Globex» will analyze risks with project construction during investment decision stage and within project due diligence. Deviation from commissioning property will also be taken into account with regard to cost structure of project control and developers such as «LiderGroup» who experiences financial drawbacks will be claimed to pass double audit of project management. Withal all projects are supposed to pass analysis of legal, technological and technical expertise. Regarding legal expertise it is worth mentioning that huge number of residential complexes, it also concerns «LiderGroup» and «CDS» developer, are complete through contract of residential-building cooperative, which is forbidden since 1 June 2018 and legislation still does not solve problem of switching legal contract form. This legal roughness appeared due to permission of raising shareholders' equity however regarding huge number of incidents with dishonesty and frauds from developers and residential building cooperative became illegal. Taking the «Nordea banking group» for instance, it has been employed international complex of criteria named Equator Principles which was confirmed by World Bank and IFC to reveal and classify external risks during conducting financing.

Methods of real estate valuation

Before moving to valuation approach of real estate, assessment methods depend on understanding subject of estimation, which outflows from interpretation as real property can be considered in different ways. Baum & Farrelly (2009) reflected homogeneity of the real estate concept and refers to necessity of considering not only owner's rights towards physical object of real property but also regard to potential benefits, encumbrances with possible ownership transition. Besides that as valuation methods are emanated from interpretation of real property, it could be defined as physical land with its constant modifications attached (Pedersen, Page & Fei, 2014). Therefore, methodology of assessing real property demands on analysis and calculation of possible returns and risks in terms of quantitative approach and revealing risks with accurate classification with feasible solutions in terms of qualitative approach.

To define investment criteria firstly we have to take into account value of any property and ways of its estimation. According to Shephard (1967) production factors aside from capital also include property and land and it goes without saying property estimation strictly depends on implementation of any land and product, which is supposed to be produced whether an investor is intended to obtain profit from business ownership. Campbell S.D. & Davis M.A. (2009) define valuation as proper amount of capital needed to purchase it in ownership. Despite that, property may be employed by various purposes and due to that, valuation methods might be different. Regarding American approach to real estate valuation, the author distinguishes that property estimation is tied up with investment purposes, taxation assessment, inheritance, speculations or resale. For valid estimation of real property, it is necessary to form valuation model properly to reflect culture and situation of real estate market, then to consider market situation with regard to market prices. Real property valuation, in its general terms, is often considered as he most suitable tool for trading price of real property object. Adair and Hutchison (2005) conceptualized compliance of following key features of valuation:

Current price of real estate refers to actual one in the property market;

Value refers to market valuation of property to be sold on real estate market;

Owning real property aside from its employment became an ordinary practice much time ago in Western real estate markets. Despite the purpose of purchase whether a bidder tends to exploit property as a business or to resell it, the price tends to be the same for both bidders with various goals. Thus, concerning investor's position it goes without saying that value of property will be regarded as discounted value of the rent flow the asset provides. On the other hand, the owner who occupied the building will regard this asset as a production factor and its value should correspond to invested capital. Besides both bidders at the expiration of a certain period will be willing to realize their owning. Pelzeter A. (2009) derived worth property concept as the most significant for real estate markets due to their low level of development regarding liquidity and division exploration and ownership rights. Moreover, according to Bardhan A. and Kroll C.A. (2008) as plenty of real estate deals are conducted by bidders, who are prone to own the property, these transactions refer to worth property concept, thus, it concerns individual issues related to security and status.

Market value

When the owner is intended to realize his asset for market or current price, it covers the market value. Jiang Q.o. and Deng X. (2011) reflected the definition of market value as the way of assumptions' classification in valuation of market price for appropriate object of property to be realized in opened marketplace. Factors influencing market value involve legal aspect, deterioration-building rate, a certain time period with respect to real estate market cycles and economic development of local area, and obviously the volume of demand and supply. To implement market value it is worth conducting coherency maintenance in estimating real estate process with regard to coherence of definitions as well globally. Therefore, the International Valuation Standards Committee (IVSC) provides sustainable standards of market value definition and defines it as an equilibrium price between bidder and offer for real estate object at the specific time period valuation with respect to conditions and other factors met together. Now we are moving to valuation methods of American and western markets.

Despite valuation standards of IVSC methods of assessing real property may vary depending on different cultural aspects and treatment of main fundamental definitions. Generally, to evaluate market value the major criteria refers to comparison with other objects. Thus, to perform evaluation a market player should take into consideration invested capital correspondence to define a model of regression. Methods implementing the given approach is treated as classical one (Cajiaas, M., Geiger, P. and Bienert, S., 2011). While other methods depicting analyzing market attitude of other market players with implementation of game theory tends to be quantitative and are treated as sophisticated ones (Pagourtzi, E., Assimakopoulos, V., Hatzichristos, T. and French, N., 2005). Methods described below also contain economic question, which has to be taken into consideration as fundamental. As it was mentioned above, the authors distinguish classical and sophisticated methods of real property valuation. However, due to various definitions treatment literature review account for more than ten, but we would like to illustrate the most common. Classical ones contain:

comparable method;

investment and income ration method;

profit method;

development/residual method;

Sophisticated ones involve:

model of hedonic prices;

fuzzy logic;

Comparable method

The first method is rather obvious and common for all countries. It covers price comparison with resembling objects of real estate. To evaluate through market value all aspects mentioned above should be considered and Agarwal and Ben-David (2015) advice to dump the price to accelerate the realization. Lorenz, Truck and Lutzkendorf (2007) investigated high dependence level on data relevance, coherence of research and comprehensiveness, transaction timeframes. Then Akintoye and Fitzgerald (2004) revealed three stages of evaluation:

Prices for each object of real estate have to be approximately comparable. Thus, explore the market and find out the most comparable sales.

Adjusting prices with market regarding similar features.

Applying research results for in accordance with initial data..

This method of valuation is widely spread in estimating residential properties due its dependence on market value.

Investment/income ratio capitalization method

Moving to next method of valuation Campbell, S.D. and M. A. Davis (2009) showed potential of previous method to calculate the value straight, while Liow and Nappi-Choulet (2008) showed necessity to modify the classical method due to high degree of market resemblance. Market of real estate investments is endowed with high level of heterogeneity, thus direct capital comparison might be irrelevant. Papastamos, D. and Matysiak, G. (2015) suggested splitting previous value model to profit from rent and property object resell in order to show correlation between rent market and investment one despite the fact that very often both market players purchase real property and change their activities. Thus, player of rental market may be supposed to resell while investor may hold his asset for a certain time-period and obtain profit being the owner. The owner or the landlord obtains monthly payment from renter, which is presented an interest return from invested capital and the level of payment is also measured by volume of demand and supply on property market. Moreover, rent payment depicts reward from usage refuse of property (C.C. Lin & S.B. Mohan, 2011). Other researchers define it as a constant cash flow enabling to assess value through current cash flow forecasting (Piazzesi, Monika, Schneider, Martin, 2009). Eventually investment/income method of valuation is suitable for immature investors with ordinary comparison and does not integrate sophisticated analysis tools.

Profits method

The profits method can be implemented in case of insufficiency of market data with regard to comparable property sales. Nevertheless, in terms of owner's purposes to run the business he or she should appeal to proper market analysis. Taking hotel business for instance, the owner has to pay attention on asset occupation, overall status and quality of hotel and number of rooms, which are expected to be occupied. Thus, the occupation rate defines level of cash flow constancy and in this case, the property object is observed as production factor with outflowing costs. These expenditures consists of direct ones with service costs and managing costs. To calculate the reward the owner has to calculate liabilities firstly as deduction from revenue indicator and the result will reflect economic rent estimation. Then the capital value can be calculated through multiplication by annual rent.

Taking other examples of business for instance, as it was observed rent value is derived from demand and supply of final product and will be implemented the same way as it was explained in terms of hotel complex. Now we are moving to the next method of valuation.

Development method

If we concern comparison, real estate sales have to be matched by single measure. Especially if we plan to purchase a land or a site, development method of property valuation would be suitable for implementation. The site value should be estimated due to its best exploration and maximized turnover. The land description often demands on financing capital, environment, grantor and grantee, location and market price. Besides, when investors are prone to purchase developing building rather than commissioned one or to reconstruct current building, it goes without saying that market value could be evaluated through development method. Thus, to evaluate market value, so-called latent value of property has to be reflected, as the asset will be increasing in price due to enhanced demand for this purchase.

Model of hedonic prices

Model of hedonic prices was designed to analyze differentiated goods. Real property possessing unique features, which do not correlate with market prices policy, tends to be measured through hedonic prices. The main reason of model implementation is to reveal affecting factors such as condition of neighborhood, ecological level, infrastructure and private demands of each bidder (Andersson, 2010).

Fuzzy logic

According to Bagnoli and Smith (1998), sources of information in terms of complication and obscurity are intended to be vague or fuzzy. Then Zadeh (1965) designed his own definition of fuzzy logic which substitutes original Aristotle's one with two feasible solutions. People communicating with each other use linguistic constructions and due to knowledge exchange find the truth. Therefore, fuzzy logic is employed in sphere where solutions of any cases could only be explored through constructive dialogue and knowledge exchange. Fuzzy logic model proves the solution for cases with linguistic input data and provides calculations of linguistic variables using membership functions.

Methods described above were adopted to Russian practice with three main branches: cost estimation method, income estimation method and method of comparable sales. These branches approximately resemble to globally known but are more simple in use. Cost estimation method is applied in construction when a building company or an investor is intended to purchase land with further purpose of constructing any property object. The point is to measure all costs to design expenditure structure and in according to this data landlord or investor is intended to exploit or resell this object to make capital. Income estimation is usually employed in case of property purchase for further employment as receiving rent from tenants or as managing already established business with clear estimation of costs. The last but not the least is comparable sales method is used by general investors or individuals who are keen on short-tern or long-term speculations on residential property market. The investor understands the market value of any object, evaluate it as acceptable for purchasing or not and expects the prices to go up. In accordance to this algorithm with recognized risks especially financial and unpredictable ones an individual decides whether considered object is worth of investment. Next chapter illustrates application of comparable sales for residential property and investment evaluation methods for commercial one. Firstly, the author defines niches of key segments, then describes market situation of each and eventually determines suitable markets and specific real property objects for making investment.

Methodology

Market situation analysis

The given chapter reveals analysis of market situation of various real property niches. As it was mentioned in the topic, two segments of real property have to be considered, they are residential property and commercial one. However, both segments are separated on subgroups representing the whole sector. Residential complexes legally recognized as living quarters and apartment hotels being defined as non-residential premises form the residential segment. Residential complexes in its terms are constituted with primary and secondary housing markets. While the commercial property niche consists of office, warehouse and trade properties. Now to understand market situation properly we are moving to analysis of residential property market of Saint Petersburg.

Residential property of primary real estate market

As it was mentioned at the beginning, economic crisis of 2014-2015 caused by occupation of the Crimea led to national currency devaluation and eventually sharp prices growth appeared especially in real estate sphere. Developers of literally all echelons started increasing their housings' prices while the demand on housing was enhancing as well due to local population purposes to hedge their savings through real estate investments despite general irrationality of deteriorating economy. Nevertheless, real estate market is expected to flatten due to increased demand, which tends to be stable since 2016 till current year. Taking into account order of purchase, the ration of direct sales and purchases with mortgage usage is dramatically disproportionate - the mortgage engagement indicator reaches 85 percent. The period of 2015 was recorder as the highest mortgage rate with range from 17 to 20 percent. Therefore, due to mortgage prevalence in real estate high rates complicate the purchase and may decrease housing demand significantly. In 2016 situation of housing credits was intended to stabilize and in the third quarter of 2018 rates started rising again to legal and political factors described above. Our analysis was based on reports of «Price waterhouse Coopers» - a multinational consulting and auditing company with head office in London in cooperation with one of the most popular ad portal «Avito» real estate. Moreover, data concerning residential property was downloaded from Colliers International website. Colliers is Canadian commercial property company, presenting real property broker and business consultant on properties market, also possesses securities, listed on AMEX. The company operates in Russia over 25 years and was already recognized as one of the most authoritative broker of commercial property.

The real estate prices dynamic is depicted in the Figure 1. As it could be learned the average prices for square meter have risen significantly. Concerning primary and secondary real estate markets from 2017 to 2018 a moderate rise was recorded and reached 1 and 2 percent respectively, while dynamic of 2018 and 2019 showed sharp prices increase in 11 and 12 percent respectively. There is no doubt that dramatic price growth is conditioned with legal aspect - changes in Federal Law №214. Besides, it has to be mentioned that initially average prices of secondary market are much higher than for primary one and according to dynamics

legislation of primary market became the reason of prices growth and direct influence of prices policy for secondary one is recorded.

Figure 1. Real estate prices dynamic of two segments of residential markets in rubles per square meter*

*Source: research conducted by The Center for Research and Analytics «Bulletin of Real Estate», May 2019.

Moving to flats' types products of building companies include studio apartments or one-room flats, two-roomed, three-roomed. Four-roomed and more

than four-roomed flats. Figure 2 illustrates the market share of flats' types in accordance with supply. For today, the leader of housing supply is turning out to

be studio and one-roomed flats with 49.27 per cent. The runner up of supply is two-roomed flats with 34.5 percent. The third place in rating is obtained by three-roomed flats with 14.22 percent respectively. Four-roomed and more than four-roomed flats tends to be in less demand due to less supply. To analyze the popularity of studios and one-

Figure 2. Market share of flats' types in percent*

*Source: Colliers International; Review of real property market of Saint Petersburg, Residential property, Q4 2018.

-roomed flats it is worth mentioned that target audience of this product is small families with lower and middle classes and also students who migrate in Saint Petersburg to graduate. Moreover, product's popularity is conditioned with lowest price for square meters and lower communal payments, which have increased from January 2019.

To analyze districts' popularity it was decided to investigate developers' preferences to start a project in certain area. Thus, building density is illustrated in Figure 3. Primorsky, Moskovsky, Vyborgsky and Petrogradsky constitute the top of the rating, which makes us claim these regions are mostly preferred by developers due to high level of popularity, while Frunzensky, Kirovsky and Admiralteysky are endowed with low building density due to strict town planning leading to inability of construction residential property.

Figure 3. Building density in districts of Saint Petersburg in percent*

*Source: research conducted by IB GROUP - Integrated Property Management, May 2019.

Then it is worth analyzing what types of housing constructions are in highest focus among developers. Basing on Figure 4 primary real estate market presents comfort-class, business class, elite class and economy class. To understand market situation properly, aside from property products supply, it is essential to analyze supply share in building types. Moreover, on April 2018 prevalence of property objects on Russian market of Saint Petersburg is presented with 52.3 percent for comfort-class, while market shares of supply of economy class, business class and elite class reach 23.2 percent, 18.9 percent and 5.6 percent respectively. For reporting period, building type supply among comfort and economy classes has grown to 54.1 and 24 respectively, while supply for business and elite classes possesses downward trend to 17.8 and 4.1 respectively. Current tendency on primary property market is conditioned with precise target audience formation from developers. As most population of Saint Petersburg is projected to purchase comfort or economy classes objects rather than building and elite ones, building companies with the purpose to maximize sales pay attention on affordable flats and follow the general demand.

Figure 4. Prevalence of types of residential complexes in real estate market of Saint Petersburg in percent*

*Source: research conducted by IB GROUP - Integrated Property Management, May 2019.

To conclude primary property market analysis it is expedient to investigate price to understand which districts are, mostly proffered by population and the structure of prices policy due to specific criteria. The top of the most expensive districts consists of Petrogradsky, Central and Admitralteysky. The average price of one-roomed flat varies from 5.7 to 8.2 million rubles and average square price reaches the range from 134 to 189 thousand rubles. Regarding the most affordable districts Krasnogvardeysky, Nevsky and Vyborgskiy districts refer to them with average price in range from 3.6 to 4.1 million rubles and average square meters price from 98 to 116 thousand rubles. Besides that, it is worth mentioning that Vyborgskiy and Primorskiy are turning out to be mostly populated. Vyborgskiy district including Murino village involves more than 400 thousand people while Primorskiy one refers to more than 1.4 million people and is considered as hard to reach in terms of transport infrastructure. Logically, these two areas possess the most building density leading to plenty of developers compete with each other and increased supply may lead to decreased demand and eventually to price fluctuations.